Are Hernando de Soto's views appropriate to South Africa?

Paper 7
The second economy and ‘dead assets’:
Why we must think beyond de Soto
Ebrahim-Khalil Hassen
In South Africa
at least, the
connection between
formalisation and
participation in
the economy is far
from assured
THE South African government – and specifically the Presidency – argues that
the country has a ‘first’ and second’ economy, and that ways should be found of
bridging the divide between the two. In line with this, the Accelerated and Shared
Growth Initiative for South Africa (AsgiSA) states that:
A final set of Second Economy interventions is centred on the challenge of
realising the value of dead assets – land, houses, livestock, skills, indigenous
knowledge, and other assets that have intrinsic value not currently realised
(The Presidency, 2005 – author’s emphasis).
The government’s proposals for addressing the problems surrounding the ‘second
economy’ include attempts to provide the poor with improved access to credit,
notably via the Financial Sector Charter. It is also focusing on formalising land
tenure in the informal sector, as well as assisting informal traders.
The concept of ‘dead assets’ and the strategies being adopted to put them to productive
use can be traced to the work of the Peruvian economist Hernando de Soto. Support
for de Soto’s work in South Africa is not a shallow or fleeting phenomenon; there
is evidence that his ideas have profoundly influenced the thinking of government
officials. For example, the Deputy Minister of Finance, Jabu Moleketi, recently
declared that the informal sector had a major role to play in attaining the goals of
halving poverty and unemployment by 2014 (Moleketi 2007).
De Soto’s thesis has an intuitive appeal. Surely, his supporters argue, having a
title deed for an informal house is better than not having a title deed at all. This
argument has some merit, but also an important limitation: it assumes that once
people who own property informally are given title deeds, they will use them for
productive purposes. However, in South Africa at least, the connection between
formalisation and participation in the economy is far from assured. On the contrary,
a ground-breaking study on the township residential property market has found that
low-income township households are not using their property to generate income,
either through rentals or for business purposes. The study thus argues that:
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